1. Over a two year time horizon an investor experiences the following net cash flows:

Year	0	1	2
Cash flow	-$8,000	$5,280	$5,320

What is the internal rate of return for the investor?

Demonstrate that a bank deposit offering an annual rate equal to the internal rate of return can replicate the above set of cash flows for the investor.

(7 marks)

2. A stock traded at an average price of $30 over the course of a trading day. The covariance of successive transaction price changes (trade-by-trade changes in the price) is about -0.05. Using Rolls model, what is your estimate of the bid-ask spread of the stock (measured in percent of the average price of $30)?

(9 marks)

3. The market index has average return 8% and standard deviation 25%. The risk-free rate is 3%. A portfolio A has beta 0.9, idiosyncratic variance of 0.05, and an M²-measure of 0.02. What is the average return on the portfolio?

(9 marks)